Uzbekistan – from vertically integrated electricity utility to energy hub of Central Asia

Published on Thursday, 04 October 2018

Published by Rafayil Abbasov on Thursday, 04 October 2018

Uzbekistan must build managerial capacity at Uzbekenergo.
Uzbekistan must build managerial capacity at Uzbekenergo.

Dramatic changes are underway in the electricity sector of Central Asia, triggered by Uzbekistan’s efforts to restore and expand regional cooperation. A double-landlocked country located in the middle of the region, Uzbekistan wants to turn its geographic disadvantage into an economic advantage by restructuring the way it trades energy with its four neighbors.

Energy resources are abundant in Central Asia, but the resource mix differs from country to country. Kazakhstan has oil and coal, Uzbekistan and Turkmenistan gas, and the Kyrgyz Republic and Tajikistan hydro. Regional cooperation could see these countries trade the most appropriate energy at the appropriate time – to everyone’s advantage.

To succeed, however, Uzbekistan must reform the legal, financial and regulatory structure of its power sector. The reforms could replace the existing utility-to-utility trade model with an energy exchange that could provide energy swaps not only among Central Asian countries but also with nearby energy-hungry ones like Afghanistan.

Perhaps the time is right for Uzbekistan to transform Uzbekenergo, the old, vertically integrated state-owned electricity utility, into a modern, regional energy hub.

  Time is right for Uzbekistan to modernize Uzbekenergo

First, consider how Samarkand and Bukhara once played a vital role as trading hubs on the ancient Silk Road trade route. The Uzbek cities thrived because of the sophisticated trade infrastructure, rules, and regulations they put in place. Many hundreds of years later, Uzbekistan needs to do something similar with its power sector. It should begin by prioritizing cost-reflective pricing for electricity as market-tradable goods.

Developing new cost-based tariffs for both natural gas and electricity would incentivize private capital for a more efficient energy mix. Under the new regional trade structure, domestic power would compete with cheap hydropower from Tajikistan and Kyrgyz Republic and could be exchanged for a winter supply of natural gas from Uzbekistan. The benefits to consumers both in Uzbekistan and Central Asian states would be significant.  

Also, to achieve trade fairness, Uzbekenergo needs to introduce international corporate governance principles coupled with segmented financial disclosures for generation, transmission, and distribution subsidiaries. Identifying revenue sources and cost centers will help better understand the country’s level of efficiency, and measures to be prioritized.

Inevitably, this would lead Uzbekistan to consider corporate transformation and unbundling Uzbekenergo’s generation and distribution subsidiaries, creating more managerial capacity and revenue responsibility in the context of the new Central Asian electricity market. The expansion of regional power trade thus provides the impetus required to reform the utility and improve the performance of the national power sector.

  3 reforms key for Uzbekistan to lead regional electricity market

Second, non-discriminatory open access of power transmission is critical for a competitive electricity market. Central Asian states have achieved different stages of power market reforms, with uneven results.

As a latecomer, Uzbekistan can learn from its neighbors’ experiences to reform regulatory and technical frameworks. It must respond not only to domestic issues, but common challenges in regional trade such as ineffective regional governance institutions and frameworks, as well as the absence of a Transmission System Operator (TSO) with authority over the regional market to align national and regional investment decisions.

To create a cross-border electricity market, rules and regulations that grant open access should be prioritized by Uzbekistan in harmony with its neighbors. Transforming Uzbekenergo into a single nodal agency—TSO and market operator—with enhanced corporate structure and financial discipline must be completed soon to coordinate the procedures in granting open access for cross-border links.

A new nodal agency would harmonize open access and power trading rules, ensuring common definitions on both short- and long-term access for all Central Asian states. By creating nondiscriminatory open access and supporting technical frameworks (grid code, etc.), Uzbekistan can catalyze and incentivize private investments in sustainable energy not only domestically but also in the hydro-rich Kyrgyz Republic and Tajikistan.

  Regional trading system to spur investment in Central Asian power

At present, Uzbekenergo is the single financial settlement point for bilateral trade with neighboring states. Despite its current financial position and issues with solvency and liquidity, the utility honors all bilateral agreements with no delays.

However, the increasing scale and scope of cross-border transactions demands a regional mechanism for energy accounting, clearing, and settlement to mitigate the risk against delay or default in payments, and avoid disputes associated with such transactions.

By creating a nodal agency with combined or separate market operator function, Uzbekistan will achieve two primary goals: (i) a financial guarantee for transactions that encourages private investment in power generation; and (ii) diversification of a power market through different modalities of trade, like day-ahead transactions or capacity sales. Furthermore, blockchain technology could allow Uzbekenergo to pioneer a new platform with open access to all eligible power traders, operated transparently on an electronic basis.

Creating a regional trading system for wholesale power supplies will greatly facilitate trade expansion and spur much-needed investment in the energy sector in Central Asia.